What Is Curve Finance in DeFi?

TL;DR

Curve Finance is a decentralized exchange (DEX) running on Ethereum. It’s specifically designed for swapping between stablecoins. All you need is an Ethereum wallet, some funds, and you can swap different stablecoins with low fees and slippage.

You could think of Curve as “Uniswap for stablecoins.” Thanks to its special pricing formula, it’s also great for swapping between different tokenized versions of a coin.

Introduction

Automated market makers (AMM) have had a great impact on the crypto landscape. Liquidity protocols like Uniswap, Balancer, and PancakeSwap allow anyone to become a market maker and earn fees on many different market pairs.

Can these AMMs meaningfully compete with centralized exchanges? Maybe. But there is one segment where they are already showing great potential – and that is stablecoin trading. Curve Finance is at the forefront of this space.

What is Curve Finance?

Curve Finance (https://curve.fi) is an automated market maker protocol designed for swapping between stablecoins with low fees and slippage. It’s a decentralized liquidity aggregator where anyone can add their assets to several different liquidity pools and earn fees.

If you’ve read our AMM article, you know that AMMs work with a pricing algorithm instead of an order book. Due to the way the pricing formula works on Curve, it can also be extremely useful for swapping between tokens that remain in a relatively similar price range.

That means it’s not only great for swapping between stablecoins but also different tokenized versions of a coin. As such, Curve is one of the best ways to swap between different tokenized versions of Bitcoin, such as WBTC, renBTC, and sBTC.

At the time of writing, there are 17 Curve pools available to swap between many different stablecoins and assets. These are, of course, constantly changing based on market demand and the ever-changing landscape of DeFi. Some of the most popular stablecoins available include USDT, USDC, DAI, BUSD, TUSD, sUSD, and more.

There is no official information about Curve team, but most GitHub contributions were made by Michael Egorov, the CTO of a computer and network security company called NuCypher.

How does Curve Finance work?

As mentioned, assets are priced according to a pricing formula instead of an order book. The formula used by Curve is specifically designed to facilitate swaps that happen in a roughly similar range.

For example, we know that 1 USDT should equal 1 USDC, which should equal roughly 1 BUSD, and so on. However, if you’d like to convert 100 million dollars of USDT to USDC, then convert  it to BUSD, there’s going to be some slippage. Curve’s formula is designed to minimize this slippage as much as possible.

One thing to note here is that if they weren’t in the same price range, Curve’s formula wouldn’t work efficiently anymore. However, the system doesn’t have to account for that. After all, if USDT would be worth $0.7, something else outside of Curve would be terribly wrong. The system can’t mend things outside of its control, so as long as the tokens maintain their peg, the formula does its job very well.

This leads to extremely low slippage for even large sizes. In fact, the spread on Curve can meaningfully compete with some of the centralized exchanges and OTC desks with the best liquidity.

There are different assumptions about trust and risk, so liquidity and execution don’t count for the whole picture. But it’s certainly exciting to see competition between the centralized and the decentralized world in this way.

What is the CRV token?

CRV is the governance token of CurveDAO, a decentralized autonomous organization (DAO) running the protocol. CRV is continually distributed to liquidity providers of the protocol, with the rate decreasing annually.

As of November 2020, each trade on the platform incurs a 0.04% trading fee that goes directly to liquidity providers.

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The risks of Curve Finance

Curve has been audited by Trail of Bits. Okay, so the project has been audited, which means it’s completely safe to use, right? Absolutely not! Risks are always involved when using any smart contract, no matter how many audits it has. Only deposit as much as you’re willing to lose.

As with any other AMM protocol, you’ll also need to take into account impermanent loss. If you don’t know what that is, read our article about it before adding liquidity to Curve. In short, impermanent loss is a loss in dollar value that liquidity providers can suffer while providing liquidity to an AMM.

Behind the scenes, the liquidity pool may also be supplied to Compound or yearn.finance to generate more income for liquidity providers. In addition, thanks to the magic of composability, not only can users trade on Curve, but also other smart contracts. This introduces additional risks, as many of these DeFi protocols become reliant upon each other. If one of them breaks, we may see a damaging chain reaction effect across the entire DeFi ecosystem.

Swerve Finance

Similarly to SushiSwap and Uniswap, Curve Finance also has a high profile hard fork – Swerve Finance. 

Swerve promotes itself as a “fair launch,” meaning there was no team or founder allocation of its governance token (SWRV). The SWRV tokens were distributed in a liquidity mining event, where everyone had the same opportunity to farm. As such, Swerve claims to be a 100% community-owned and governed fork of Curve.

Closing thoughts

Curve is one of the most popular AMMs running on Ethereum. It facilitates high volume stablecoin trades with low slippage and tight spreads in a non-custodial way.

Another thing that places Curve Finance at the core of the DeFi space is how other blockchain protocols are heavily reliant on it. Composability between different decentralized applications does have its risks, but it’s also one of the strongest advantages of DeFi.